A corporate investment manager needs to invest $1,000,000 for the next 6 months.The current nominal rate of interest in the United States is 5%,while the nominal rate of interest in Argentina is 8%.Which of the following statements is MOST correct?

Question

Quizplus · Accepted Answer

The international Fisher effect suggests that higher nominal interest rates in a country reflect expected inflation rates. Therefore, investors can expect to receive higher returns but may also face a higher inflation rate, which reduces the value of their returns. The manager should take this into account and consider both nominal interest rates and inflation rates. As the nominal interest rate is higher in Argentina, the manager might be tempted to invest there. However, the expected inflation rate in Argentina is also higher than in the US, which means that the extra interest income may be worth less in one year. Therefore, the best choice is to invest in the US, where the nominal rate is lower but the expected inflation rate is also lower, resulting in a potentially higher real return.

A Corporate Investment Manager Needs to Invest $1,000,000 for the Next